Juniper Networks (JNPR -0.08%) posted unsurprising third-quarter results, and the midpoint of management's revenue guidance for the fourth quarter leads to the third consecutive year of revenue decline. The network vendor is about to reverse that negative trend, though. Yet investors should stay prudent. Here's why.

Mixed Q3 results

During Q3, revenue stayed stable compared to the prior-year quarter at $1.1 billion. The growth in the company's service provider (telecommunication and cable operators) and enterprise segments offset the 7% year-over-year decrease in the cloud business.

Given the coronavirus-induced strong growth of cloud computing, that weak performance in the cloud area seems surprising. But quarterly results remain volatile because of the fluctuating investments of a few large customers. Beyond the short term, management expects the cloud segment to grow. Indeed, last year, Juniper transitioned its networking portfolio to better address the need of cloud customers with cost-effective, scalable, flexible, and performant solutions with its PTX routers (network devices that forward data between networks).

Hands typing on laptop with cloud above it

Image source: Getty Images.

In contrast, the company's service provider segment grew 5% to $475 million. However, given customers' business challenges, management still expects that segment to decline this year before stabilizing in 2021. As an illustration, the U.S. telecom giants AT&T and Verizon must scrutinize their spending as they are dealing with flattish revenue growth and significant debt loads.

Finally, the enterprise segment increased slightly to $410 million during Q3, and management indicated double-digit order growth. That success is partly due to the company's updated portfolio with the integration of the artificial intelligence (AI) and cloud-based management technologies developed by the wireless specialist Mist Systems (acquired in 2019).

Back to growth

Given the company's improved portfolio, CEO Rami Rahim expressed confidence in growing revenue going forward. During the earnings call, he said: "Our momentum is strong entering our fiscal fourth quarter and this momentum is increasing my confidence that we will be able to grow the business on an organic basis for the full year '21."

In addition, Juniper made a recent move that should boost that growth. It announced two weeks ago its intention to acquire 128 Technology for $450 million to strengthen its AI capabilities across its SD-WAN (Software-Defined Wide Area Networking) portfolio. SD-WAN allows companies to optimize network traffic depending on criteria such as performance and cost.

Juniper could replicate the success of its Mist acquisition by integrating 128 Technology's AI capabilities into its networking solutions. And the growth potential seems attractive. Management estimates the SD-WAN market will grow at a compound annual rate (CAGR) of 28% by 2023 to approximately $4 billion.

Granted, the SD-WAN market remains crowded. But that strategy differentiates Juniper from its networking competitor Arista Networks. The cloud network vendor has yet to offer such SD-WAN capability despite its footprint in enterprises and its entry into the campus (local data centers) market in 2018. 

Pressured margins and limited upside potential

In the context of coronavirus uncertainties and considering the company's top-line decline since 2018, growing revenue again certainly represents an encouraging development. Juniper stock also looks cheap at only 1.6 times the midpoint of management's full-year forecast revenue range.

However, the company's profitability seems more problematic, as operating margins have been declining over the last several years because of competitive and pricing pressures, especially in the cloud market. In comparison, competitors Cisco Systems and Arista Networks have been increasing their higher operating margins thanks to their scale and innovative cloud networking offerings, respectively. 

JNPR Operating Margin (TTM) Chart

JNPR Operating Margin (TTM) data by YCharts

In addition, Juniper isn't likely to improve its margins in the medium term. During the last quarter, the company's operating margin dropped to 11%, down from 12.2% in the prior-year quarter. And management expects the non-GAAP (adjusted) operating margin to stay flat in 2021 because of the costs associated with the acquisition of 128 Technology. 

Given Juniper's challenged margins while annual revenue growth has yet to materialize, the company's trailing 12-month (TTM) price-to-earnings (P/E) ratio of 17.7 doesn't appear that attractive. Management will hold an analyst event during the first half of 2021 to discuss its long-term goals, but I don't see any meaningful upside potential for the tech stock at this point.